McDermott Company has developed a new industrial component called IC-75. The company is excited about IC-75 because it offers superior performance relative to the comparable component sold by McDermott’s primary competitor. The competing part sells for $1,360 and needs to be replaced after 2,160 hours of use. It also requires $280 of preventive maintenance during its useful life.
The IC-75’s performance capabilities are similar to its competing product with two important exceptions—it needs to be replaced after 4,320 hours of use and it requires $380 of preventive maintenance during its useful life.
Required:
From a value-based pricing standpoint:
1. What is the reference value that McDermott should consider when pricing IC-75?
2. What is the differentiation value offered by IC-75 relative the competitor’s offering for each 4,320 hours of usage?
3. What is IC-75’s economic value to the customer over its 4,320-hour life?
4. What range of possible prices should McDermott consider when setting a price for IC-75?